Divulging the 'Secret Sauce' of S&OP

"Everybody does it - but few really understand it." That could be an appropriate tagline for sales and operations planning, a valuable concept in modern-day supply-chain management that is nevertheless difficult to define. Is it a process? A management philosophy? A piece of software? In this interview, conducted at the Gartner Supply Chain Executive Conference in Palm Desert, Calif., DCRA Inc. president Jon Kierkegaard offers his view of S&OP. He explains how companies can use it to bring together, not only the functions within an organization, but all of the key partners that make up a supply chain. And he lays out the benefits of implementing a strong S&OP program, while challenging some common misconceptions.

Q: Share with us your view of sales and operations planning.

Kierkegaard: The reality of S&OP is that everybody does it. If you run a business, sometime in the month or year you match demand and supply. What's evolving in S&OP is the ability to reduce the cycle time it takes to scientifically net demand and supply - particularly when it comes to global, long-lead supply chains. Oftentimes you can use S&OP to sell things before you have to pay for them - which is almost a perfect economic model.

Q: From an S&OP perspective, how can clients really step up and generate value in their organizations?

Kierkegaard: The first tenet they need to understand is that they do it already. Don't let some software company or consultant come in and say, "You know nothing about your business - follow my process." What sales and operations planning really can do is let you use less working capital to accomplish more sales. That's the magic behind S&OP.

You can use some basic time-phase netting algorithms that link master planning with distribution planning into international transportation lead times. By using that very simple science, connected with the demand and supply patterns in your business, you can calculate things that you would guess at before. You can compress the time it takes to do that demand-supply netting, and therefore make people work better together, particularly in an outsourced supply chain.

Q: S&OP sounds like a great way of tearing down the silos in an organization.

Kierkegaard: It really is. I had a chemistry professor in engineering school who was a Nobel Prize winner. He threw the book away for the first week, wrote "precision" and "accuracy" on the board, and asked us students to define the difference. None of us could. To me, the endemic problem in the supply chain today is that you have very precise applications, and oftentimes they're wholly inaccurate. What you really need is a tool to be very accurate about your demand-supply netting, and how your working capital assumptions are being managed. Then you can work on [achieving] precision in the areas where you have data and can bring it in line. S&OP's a perfect process for doing that.

Q: What are some common misconceptions that people have about S&OP?

Kierkegaard: The biggest one is that it's a software product. I've always been frustrated by the over-simplification of the software business. The reality is, S&OP is a process. It's a philosophy of how to make things profitably. If you use technology the right way, you can dramatically reduce the cycle time to net that demand and supply. It's a workflow, and there are so many thousands of permutations of how your company interacts in demand/supply, let alone your suppliers, that you need to have a very flexible process. Then you can pull in tools to actually do the calculations and share them back out.

Q: What is the bare minimum that you need in order to make all this work?

Kierkegaard: Ninety-five percent of all supply-chain planning is done on spreadsheets. Software companies will say that spreadsheets are evil. The reality is, spreadsheets are great. They give people the intellectual capability to contribute. You need to have some back-end coordination to synchronize your supply-chain execution data before you start the plan.

Another misconception is that S&OP should be one way - it should be a cloud, it should be a software product. S&OP is your business - it's not something you add on to your business. It's the core of your financial system.

Q: You say that all companies have some form of S&OP in their operations. But what's the real "secret sauce" of the S&OP that you're talking about? How is it different from the old way of doing things?

Kierkegaard: I go back to one of the gentlemen I had the pleasure of working with in my early days at i2, Ken Sharma. He used to [say it was like] driving down the autobahn - if you had an ERP system, you were driving at 100 miles an hour, looking in the rear-view mirror and trying to steer. If you have the right kind of tools, you need to be looking out the front windshield. And when that turn comes up, you can make it.

S&OP is a forward-looking financials system - it's not a supply-chain or logistics system. It's your financials, the basics of working-capital consumption and cash flow, and the ability to project forward. We create "forward-looking balance sheets," which balance commitments on the supply side against the demand side, matching them up so you can look six months in the future and see what the balance sheet might look like going forward.

Production-planning guys in the fifties and sixties invented MRP [material requirements planning], and the algorithms aren't black boxes. They're time-phase netting algorithms that synchronize the flow of material based on lead time. However you want to weave them into your business, those algorithms are a secret sauce. You can't look at just the four walls of your business. You've got to look outside, pick up demand signals early at the customer, and as far back as your supply chain goes. I don't know of too many products or companies these days who don't have at least a component of their product that isn't heavily dependent on some third party back in their supply chain.

Q: You did a white paper on this subject. Tell us about your conclusions and observations.

Kierkegaard: We've never gone into a client and talked [at the outset] about S&OP. You talk about how you can create value and competitive advantage. We have a methodology called Total Order Fulfillment. Over the years we've discovered that you can use transportation very early in a process to get huge returns. Often what happens in bad supply chains is they use transportation to make up for mistakes. When you made stuff in Toledo and shipped it to Topeka, you hired an LTL [less-than-truckload] company instead of a full truckload company. But now you make it in Guangzhou, and you have to coordinate it through the Port of Long Beach, and it's three months or six weeks to get it here. You can't make it up with transportation. You can, however, use transportation to generate more cash.

The white paper we've created is about S&OP solutions linked with the dynamic lead-time management of global transportation. We work with a partner, Freightgate, which has something like a Priceline.com for the supply chain. When an average company hires a freight forwarder to move something from Guangzhou to Dallas, it might give one option. But there might be 10,000 different options, with different lead times and costs. To give you a simple example, we helped Siemens take 25 percent of their orders and drop-ship them directly from their contract manufacturer, so they had negative working capital for those orders. Then we took the next chunk of orders and set up a postponed manufacturing operation, using S&OP to coordinate it so they had less inventory to accomplish more variabilities of modems. And then we charged a little higher price for modems that were already built. Almost any company can use S&OP in better understanding their transportation [needs]. If you have a long-term strategy around your supply chain, you can use those dollars and put them back into gluing in the S&OP demand-supply match, so those expedited behaviors don't come back.